Norske Skog: Continued good performance

Strong demand for Norske Skog's products in all regions resulted in high capacity utilisation and net profit in the third quarter of NOK 190 million. This demonstrate the long-term trend of good performance. So far this year, the net profit is NOK 430 million.

Gross operating earnings (EBITDA) in the third quarter 2016 was NOK 251 million, which was a decrease from NOK 335 million in the second quarter, mainly due to somewhat higher energy and recovered paper cost and weaken pound. Net profit in the third quarter was NOK 190 million compared with a negative NOK 874 million in the third quarter 2015.

- Despite a comprehensive refinancing of the group this year, the business units have completed major cost reductions and seen significant progress on new growth projects. The green shift transformation of Norske Skog into new segments will be more prominent in the years to come. The improved market balance should allow for a substantial increase in sales prices going forward, especially after significant capacity closures in Europe and North America combined with a flattening of the demand curve, says Sven Ombudstvedt, CEO of Norske Skog.

Cash flow from operating activities before net financial items was NOK 115 million compared with NOK 321 million in Q2 2016. The cash balance at the end of the quarter was NOK 570 million. Net interest bearing debt was reduced by NOK 0.2 billion from the end of the second quarter, from NOK 6.4 billion to NOK 6.2 billion, as a result of a stronger Norwegian krone against all major currencies and bond buybacks. The equity was NOK 269 million at end of the third quarter compared to NOK 190 million at the end of the second quarter.

Key figures, third quarter of 2016 (NOK million)

Q3 2016

Q2 2016

Q3 2015

2015

Operating revenue

2 918

2 891

2 779

11 538

Gross operating earnings (EBITDA)

251

335

163

753

Gross operating margin (%)

8.6

11.6

5.9

6.5

Gross operating earnings after depreciation

95

149

-27

-14

Restructuring expenses

-1

-46

-2

-53

Impairment

-

-1 238

-

-

Other gains and losses

20

-10

-137

-97

Operating earnings

114

-1 146

-167

-164

Share of profit in associated companies

-3

-204

-7

-41

Financial items

84

1 359

-782

-801

Income taxes

-5

220

81

-520

Profit/loss for the period

190

229

-874

-1 526

Cash flow from operations before net financial items

115

321

2

66

Net interest bearing debt

6 172

6 353

8 377

8 523

Market outlook

The market balance for publication paper in Europe is favorable with modest demand declines and reduced supply due to capacity closures. The newsprint market will tighten further in 2017 with significant additional European capacity closures already announced, which should lead to price increases.

The Asian export market for newsprint, of increasing importance to Norske Skog due to a smaller domestic market in Australasia, is encouraging with price improvements.

Ongoing growth initiatives will begin to contribute meaningfully to gross operating earnings from next year and reach full run-rate within a timeframe of 3-4 years. Fixed costs initiatives continue at all mills towards a group level run-rate of NOK 600 million per quarter.

Recent foreign exchange developments, particularly from GBP depreciation, but also from NOK appreciation to EUR is a headwind for the group. Combined with somewhat higher energy and recovered paper costs, this will diminish the positive seasonal effect from higher sales volumes in the fourth quarter.

Markets and segments

Total annual production capacity for the group is 2.7 million. In Europe, the group capacity is 2.0 million tonnes, while in Australasia the capacity is 0.7 million tonnes. Capacity utilization for the group in the third quarter was 93% compared with 92% in the second quarter.

Variable costs increased per tonne due to higher energy and recovered paper costs. Fixed costs remained unchanged from the second quarter. Gross operating earnings decreased quarter-over-quarter with lower revenue, cost inflation, and reduced contribution from Golbey in France due to its annual maintenance stop.

Demand for newsprint and magazine paper in Europe decreased by 3% and 2% respectively through August compared to the same period the year before. Capacity utilisation remained high at 92% in the period (92% in Q2 2016).

AustralasiaOperating revenue increased from the previous quarter with higher sales volumes at Boyer. Publication paper prices in Australasia remained relatively stable as long term contracts are an important constituent of the business.

Demand for newsprint in Australasia decreased by 6% through August compared to the same period the year before. Demand for magazine paper was relatively stable. Capacity utilisation was close to full at 97% in the period (91% in Q2 2016).

Update on new growth opportunities

Growth project at SaugbrugsThe NOK 150 million biogas project at Saugbrugs is on schedule for completion by year-end 2016. The biogas facility will be at full run-rate contribution to gross operating earnings in 2017. Saugbrugs has, in addition, initiated growth projects related to the development of microfibrillated cellulose (MFC) and fibreboard.

Growth projects at GolbeyThe Golbey biogas plant is under construction, and is expected to be completed during 2017. The project will be financed locally. The plant will be connected to the biological-chemical treatment plant and be dimensioned to absorb all organic waste from the paper production. At the same time, Golbey is implementing new projects, which will combine synergies from the existing mill and nearby industrial clusters.

Tissue project at BruckNorske Skog is in partner discussions for a brownfield conversion of the newsprint line at Bruck in Austria to tissue. The 125 000 tonnes newsprint machine will be closed at the end of 2017, while the 265 000 tonnes LWC machine will continue production.

Wood pellets in New Zealand Nature's Flames pellets production has reached an annual capacity of 40 000 tonnes. Norske Skog considers to expand the production of pellets, given the considerable competitive export advantage. Wood pellets are a renewable alternative to fossil fuels in the large economies of South-East Asia.

Presentation and quarterly materialA recorded webcast of the CEO presentation, the quarterly financial statements and the presentation package will be available on www.norskeskog.com.

From 1 November 2016, Norske Skog's press- and stock exchange releases will only be published through the Oslo Stock Exchange website www.newsweb.no, the Norske Skog ticker or IssuerID being NSG.